Privia Health Group, Inc. (PRVA) Earnings Call Transcript & Summary

Good afternoon. My name is Lisa Gill, and I'm the health care services analyst with JPMorgan. It is with great pleasure that we have with us this afternoon, Privia Health. With us from Privia Health is CEO, Shawn Morris; and COO, Parth Mehrotra, my god, I'm terrible. Parth, you have to just change your name to like share like Parth is here as well. What we're going to do is we're going to run through a quick presentation. And then Shawn and Parth will join me for a Q&A. Parth, every time I screw that up.

Parth Mehrotra. But we -- if any of you guys know Parth, it's just Parth. So Shawn Morris, CEO. Lisa, thank you so much. We really appreciate it. And well, I guess, getting sandwiched between a couple of biotherapies. We get a whole audience we've never seen before. So we appreciate -- thank you for your interest in Privia Health. I've skipped the disclaimer slide and jumped right in. Privia Health, we're highly differentiated physician alignment model. We believe it's an intriguing investment opportunity, work with all providers, all types of reimbursement schemes across that patient cohort. We're succeeding in a $2 trillion TAM. There's 1 million physicians out there. We're upward -- you'll see the numbers here. We've got a big runway to go and really a very balanced, diversified book. We -- it really includes 80-plus value-based arrangements, 4 million patients, 850,000 of those are in value-based care, over 920 locations care centers. So you can, again, just kind of see the scale, great leadership team. I've been fortunate enough to be in the public environment a couple of times. I put this leadership team and understanding of really what value-based care contracts should look like on the behalf of a physician and a care center to succeed. I'd put this team up against anybody in the industry. And kind of last but not least, it's an alignment model since we are working very closely with our physicians and our care centers. And we don't -- it's -- we really -- the physician is our customer. That care center is our customer. We take pride in kind of being thoughtful really kind of getting the risk in a responsible way not to mismanage that responsibility. Yes. The model -- we've been at it about 8, 9 years. It's really very scalable, very replicable. There's kind of 4 key elements. I think this is differentiated into kind of our peer group. We established a single tax ID, a top box on the left. Think about that as a medical group in a sense and that's where the payer contracting for the fee-for-service the contracts take place. That's where the clinical decision makes. You see the bottom left-hand side, I'll talk more specifically at is where the physician governance occurs, big part of our model. You dropped out of that bottom box on the left there, full tech stack workflows that actually reinforce kind of what we're trying to accomplish in those value-based lives with a performance consulting team that's in working with the physicians. And then we establish a risk-bearing entity that holds all the value-based care contracts, of which I noted earlier, we have 80 plus. But that bottom box, if really without -- if you're not building physician leadership in those communities, I hope this doesn't bind to any doctor in the room, but that's not a natural attribute for a community doctor about how to be a leader, how to bring your colleagues along, especially in the areas of taking risk. And we actually -- we really take pride -- this year, we actually had 25 physician leaders in a governance program, really how to become that community doctor, and we spend a lot of time doing that. The -- really, the -- our goal is to kind of build the largest ambulatory primary care-centric model and network in every state that we enter. Some of these become multiple regions or states within regions. And a little bit of the history started in the Mid-Atlantic and actually in the rest of Virginia market about 9 years ago, 4 family practitioners, so a handful of patients, and you can see kind of the scale we've built in this length of time, where -- as of this date is as of 920. So about 3,600 implemented providers. It's primary care centric and we really look at -- of course, family practice, internal medicine, pediatrics, we include in there that makes sense, and we also include women's health. Women's Health drives a big part of our clinical decision-making as well as women as we know in the world today are making much more of those decisions for the family. That is our primary care base. We have over 50 other specialties. So we're building multi-specialty groups to take risk over a period of time. See again, that 850,000 attributable lives, 4 million total patients. What really kind of proves the value, we have a very low attrition rate. These are contracts that are 3 years and so the physicians are -- they're well-being as being approved, some combination of administrative burden relief and financial activity. And you can see kind of industry-leading NPS scores, and we're not writing a check to buy any practices. So these care centers are coming and joining into our contracts for 3 years. A little bit of kind of the strategy. We always say it's simple. It's elegant, but simple. But it's also very hard to duplicate. So we enter a market with an anchor practice. We can either buy a tax ID, we can just -- we can form our own medical group, depending on the corporate practice of medicine or we can partner with a medical group or a health system or a payer to do this, then we begin to -- it's kind of a land and expand. We're beginning to bring other providers into that tax ID. Along the way, we're improving the functionality of things -- of basic things like rev cycle, consumer experience, and delivering on the tech stack and the functions of I think about how to make -- just making an appointment, getting the patient reminder to the patient virtual care, the data coming in, driving the workflow of the provider. And we use that in attempt to teach them the basics of value-based care. And then the ultimate is to move that market, move those physicians over time to value-based contracting, accepting more risk along the way. A little bit about the 850,000 lives I spoke to earlier. You can see it's, again, by 80-plus value-based care contracts. These run the course of upside commercial, maybe some quarter risk in commercial. You can see the government lives on the right, big MSSP player. We've been doing it for years. You can see the percentage of the -- that's in enhanced, 77% of these lives are in enhanced. We actually operate the #1 ACO in the country from a shared savings perspective with anything over 40,000 lives, over 100,000 Medicare Advantage lives and where -- from full capitated risk to upside and you can see some Medicaid lives there. A little bit on the -- just -- you really -- as you're moving physicians to risk, you have to kind of think about things like how are you going to -- what's the oversight of compliance, audit, all those functions medical groups aren't used to doing. Think about some things think payers would do when they're accepting risk and then you really have to execute. And really, it's just -- we kind of look at this as a philosophy of -- we want to work with these doctors, identify them, teach them how to take risk in a responsible way. We're aligning their incentives. They're putting up escrows a lighter wrong side of us we're building these groups, and then we take that over a period of time. And we do that regardless of it's commercial, Medicare, traditional Medicare and a direct contract or CMS or we do that in a Medicare Advantage. But you see there, we're doing it in a profitable manner. And our physicians where they kind of self-select in. These are physicians that have been successful in some value-based care. Some have 0 very little experience average practice that joins a Privia Medical Group is 5. So you can see this is a -- it's a really -- we're organizing doctors into a single tax ID from very small groups into very substantial practices. If you don't do it in a way, these next couple of slides about results, you have to have results. We all know that it's -- Parth is kind of famous for [indiscernible] risk for a reason. And you can see this is in our MSSP population. We've been doing it a while. You can see kind of that second -- to the right-hand column there, the improvement we're seeing over our peer group, then obviously, that grows substantially even over Medicare fee-for-service. The kind of this as of 930 with kind of excellent quality scores. Another 1 on the -- we get this ask us a question Lisa is kind of famous for asking us this question is like, why don't you move faster? And we're -- again, we're just very thoughtful that our doctors have their money in this too. We're not backstopping them as a shareholder, you're not backstopping them. But you can see kind of as a percentage of GAAP revenue, the last 3 years have gone from 11.4%, 12.4%. We made a big jump this year to 28%. A little bit of all this creates some momentum in how we grow. So you kind of -- we look at this digital is kind of same-store growth. So thinking about we've established that anchor group. We had a 5-year plan on any doctors that come in and we're growing that practice in a responsible way. We assign a kind of a business professional to become a performance consultant to a subset of groups, and we put them on a 5-year plan. And what does it look like to kind of begin to grow, what kind of capacity they have, what kind of providers we need to bring in. And then, of course, the yellow boxes, we want to move to value-based arrangements. And in each one of those existing lives in that practice, how can we get higher yields by taking various levels of risk. And then organically, then how can we continue to build that single tax ID medical group attracting new providers into the group within the geography. And over 50% of our physician care center ads come from referrals of our physicians to their colleagues. And then that fourth step and fifth step really is then we just run this flywheel in new markets. And in the last couple of months, you've heard us talk about, we've gone into Ohio with Ohio Health. We've gone into North Carolina with Novant, and we're very excited about that. Strong execution in the last 2 years since our IPO. You can see kind of the number of states there. Implemented providers have grown 44%. Practice collections. That's our top line number. We call it practice collections versus looking at it as GAAP because of corporate and noncorporate practice in medicine states, which you can see that's grown 82% in the 2 years. And really, what we're most proud of, probably, and we are 1 of the most kind of from an adjusted EBITDA perspective, we've grown EBITDA in the last 2 years over 100%. So we're excited about that, and we're obviously continue to grow. Strong balance sheet is important in the sector. No debt. We've paid our debt off in this year, a strong balance sheet, $342 million. And really, we expect 90% of that because of some NOLs and then adjusted EBITDA to convert to free cash flow. So it's a strong cash producer in a cash flow perspective. With that, we can turn it over to questions.

So thanks very much for the overview. Obviously, there's a lot of different types of models in the marketplace today. So either 1 of you, I don't know who wants to kick off here. But why do providers choose Privia over some of the others? And not just other models that are in the marketplace, but clearly, there's other opportunities, right, to be working for a hospital to be owned by a hospital, maybe talk more broadly about why they select Privia.

Yes, definitely. Give Shawn a break there. Look, fundamentally, providers have existed for as long as health care services have existed, and they've been over 30, 40 years, multiple attempts to consolidate this. I would say, first mile of health care is the first point of contact for all of us, our families. And we think we're on the right side of history where not all providers want to be employed by some entity. It's been tempted, whether it's a hospital, whether it's a big payer or whether it's a facility, whether it's private equity rolling up. A model like Privia, we don't think existed where providers can retain their legacy ownership structure, no matter how big or small that might be everything from a solo doc to a big multi-specialty group but yet be part of something bigger. And I think that's what we offer. They are part of this bigger entity for all of their patient panels across all reimbursement models and as those change over time in a state. And I think what's catalyzing that movement is with the untenable situation we have, cost quality, everything else and all of you know better, providers cannot survive stand-alone. They go to medical school to learn how to take care of patients. Value-based care in its essence is provider entities starting to assume risk and managing total cost for the underlying populations. That is very hard to do as a small practice. Very -- Rule 101 of taking risk is you got to pull the risk. You got to have expertise to do that from an actuarial perspective, technology perspective, capital perspective, which independent practices don't have. So we offer this best of both worlds in a model where providers can remain independent, yet be bought as something bigger. And I think that's very, very unique to us. For all kinds of providers, all specialties, all reimbursement models in all patients.

Yes. The only thing I would add is when you think I mentioned we're not buying practices. Let's just not we entice them with a big check. We're not giving them a bunch of equity. I think most practices have either maybe been successful in a contract or 2 maybe in value-based care and some have not been successful at all, but there is a lot of pressure to move to value-based care. So when you see a colleague or you know someone around the country, it's improved and they're talking about the success and they ask 1 another, like would this work for me. And there's just we all know there are some early adopters, there's people that wait. And then what we typically started with was community docs. And now we all know however you measure there's somewhere between 40% and 60% of the doctors that are out there in the health system. And so how do you -- these forward-leaning health systems that are faced with the exact same thing, and they've got underperforming medical groups, maybe they have an insurance license and they've been buying practices and they're looking for another alternative like really look at premium side, you don't buy practices. You have great success in moving from kind of fee-for-service to value, but you also are able to manage fee-for-service and value-based care and all the flavors in between. And that's really what we're looking for. And we've got -- and we know that utilization is going down, so I have to have kind of a rope into the community and have kind of another way for physicians to kind of become part of a system that works for.

Where do you think we are on the continuum of value-based care? And I think that Privia is really differentiated in that. You're talking about all payer types, right? So many of the other entities that are here today talk a lot about Medicare Advantage and really having a single focus around that market. So first talk about, in general, where you think we are in value-based care. And then secondly, when do you think other models, whether it's Medicaid or the commercial market will really start to adopt value-based care type of initiatives and payment?

So I think it's a nuanced answer based on the patient cohort we're looking at. For the commercial population, all of us in this room, whether it's self-insured or a PPA model, it's very hard to take risk. It's open access product. We like to go anywhere we like. We like to access the best doctor wherever they might be sitting. It's very hard for a provider entity to assume risk. We are trying to be pioneers in it and doing that with certain corridors, with certain cost quality metrics. So there's a value orientation to traditional fee-for-service, where you just show up and the doctor gets paid for that particular visit. So we're trying to -- in our books, we have about 500,000 commercial value-based lives, where we are getting paid by the payer in doing -- bending some quality metrics, screenings, preventative measures, so on and so forth in addition to lowering overall their MLR below certain benchmark. And I think those are early stages of value in commercial. I would say that those -- that's probably in the first, second innings, if I were to calibrate that. And I think that will evolve over time as we develop big networks, and there are trade-offs. If you were to narrow network the product, you can manage the population much better, and I think the ability for a provider network to take risk would increase. I think moving on, the most easiest understood is Medicare Advantage, where I think we're probably in the middle innings. I think both with the commercial payers with CMS, they've stated every beneficiary would be in a value-based arrangement by 2030. I think whether it's the MSSP program, the ACO REACH program, and then obviously, Medicare Advantage, I think that flywheel is running, and I think we're probably in the middle innings, but still a lot of adoption to come. Medicaid is probably the most nuance because you're dealing with a population that is challenged from a social determinant perspective. The state government has to play a big role. They are intertwining aspects between nutrition, transportation, income levels in addition to managing the person's health care cost. So I think if the provider entity is enabled and helped on some of those social determinant aspects, I think you'll see Managed Medicaid take more scale. But I think, again, that's probably in the early innings. So overall, we would calibrate as pretty early innings, if you were to combine the 3.

When Shawn was finishing his discussion, he was talking about your 2 new states, right, Ohio and North Carolina, where those are health system relationships. So maybe talk about how those are a little different than, say, the stand-alone physician. We've seen over the years that hospitals have bought groups of physicians, how they really manage them well, doesn't feel like they have from the outside. It feels like there's a nice opportunity for somebody like yourself to come in and really help the -- for them to really truly learn value-based care.

Yes. We -- 5 years ago, we were approached by Health First's Steve Johnson down there. And I would -- I credit Steve for a very forward-leaning CEO of Health First in Cocoa Beach area, and they had done an 18-month study. And they were really looking at the big medical group. They were looking for a technology solution. But what they really wanted was they also had a health plan. They have Medicare Advantage, but it was performing okay. But what they knew that it had some additional room to run. And -- but they also -- they went out and surveyed their community doctors said, what do you really want? They said, we don't -- we like you as a hospital. We don't want to be employed by you, but is there -- can you help us contractually, can you -- could we all be on the same tech stack where we can -- patients have a different experience and all those things, and Steve pursued us, it was interesting. And we were kind of like, why are you talking to us but -- and it took a while for us to kind of iron through that. But what we've learned, I think, through COVID and the tailwinds the health systems are facing, is we've had the health systems come to us. And we've been -- and this partnership has gone really well for everybody. And I think that -- we looked at it as almost like a pure TAM perspective, half the doctors plus sit in these relationships. Some are very unhappy. And some of the health systems are saying, I really need a more capital-efficient model. I do own some groups. And you know what, I'm okay with them, but I need a model where if they want to choose to go somewhere else, it's a friendly model, fall into kind of -- and still refer to me as a system. And I need a model that my other community docs don't get bought up, go to a competitor, go to a roll-up in private equity or whatever, and they need to perform in value-based care and I'd really not rather employ them. So it's -- we see it as a tremendous opportunity. Now I'll tell you, this isn't -- every health system is not a Privia client. I mean they have to be thinking in that vein, just we want to move towards value-based care. We want our physicians to be successful in the community. And then as you know, Lisa, I think these 2 Ohio Health and Novant between them probably have 3,500, 4,000 physicians that are not moving to our platform. But it's -- so we fully believe we get in there and do a good job. This gives us a whole another hunting license and why not move everybody at some point. Now we have to do a good job and time will tell, but we believe this is a -- Privia is more suited to go and do this because of the attributes that I talked about that they're looking for.

Are the economics the same -- so if I just go back to last quarter, right, you called out $4 million to $6 million of start-up costs associated with these health system partnerships in North Carolina and Ohio. And basically, it's like a license to hunt, right? So you're going out, you're going to try to sign up some physicians. So are the economics similar for these types of relationships and -- versus your kind of traditional?

Yes, the economics are the same. So those costs are in any new state that we enter, not related to just any health system states. If you understand our model. We enter a state. We established a sales team, leadership team. We go and recruit docs to join this model, and that takes a year, a couple of years. And then the docs join, they get implemented and then we get our contribution. So those start-up costs are irrespective of how we enter a state. And we'll try and break even in years 2, year 3, depending on the state and the size and so that's the initial startup cost in any state.

And so if I remember correctly, you target 400 to 500 new providers each year. When you think about the visibility as we sit here today for 2023 of that 400 to 500, is there like a pipeline? Like how do we think about the level of visibility that you have?

So the 2 metrics we look at. One is the visibility of the financial metrics that we guide. So sitting here once we guided the -- at our Q4 call in 6 weeks here, we would have close to 95% of 2023 baked in. From a top line contribution perspective because those are providers and doctors that are already sold, implemented and very few new would be sold and implemented in the year. The second visibility is, I think this is the way you asked the question, like what do you have visibility in the sales pipeline to get another 300 to 400 in that year -- 400 to 500 in that year. And we have our TAM analysis. We -- our penetration is low single digits across all our markets and some of the new markets at 0. Even the most mature market is sitting at high single digits. And the flywheel runs because the longer we are in a particular state, doctors sell best to doctors. And they are telling their colleagues to join because they've done so well. So we based that metric on the funnel we see, and which have pretty high visibility.

So when I think about that $4 million to $6 million for the new state regardless of the type of entity that you're going after, is that establishing relationships with doctor groups initially? Is it advertising to doctors? Is it getting your initial base of doctors that are then going to help you to recruit others? Like how do I think about where that $4 million to $6 million goes?

It's pretty much a $2 million to $3 million per state across sales infrastructure, marketing, implementation and getting the initial set of doctors onboarded and the leadership team to run that state. So I think it's all of those costs combined is $2 million or $3 million. Again, pretty capital efficient. We expect it all.

Right, it's in the P&L.

The variability is a size and your TAM that you're going after in that market.

Again, I know that you're going to give us 2023 guidance in 6 weeks. But are there any key revenue or EBITDA headwinds or tailwinds for us to think about at this point for 2023?

Yes. I mean, most of it is given the business model pretty well documented. We talked about these new states and there and the cost to enter them. We're still finalizing our MA book. We have about 110,000 MA lives. We took about 30,000 of those and moved them into capitated arrangements last year. We're evaluating how many of the rest do we move or not move. And so all that gets finalized and so we guide, I think that could be a moving piece to the guidance. And then if we announce any new markets, again, that we have to factor that in. That's 1 of the reasons we don't like to preannounce because there's a lot of business development activity, if something hits between now in February, we'd like to include that in our guidance. So those will be the moving pieces. And again, Shawn showed up the slide since IPO on the execution. I mean, we've had a couple of great years. Last 2022, we grew top line 45%, EBITDA 50%. And so again, our long-term metrics have grown top line 20%, EBITDA 30% over 10 years. And I think we've accelerated a 5-year model pretty well the last couple of years. And -- so there will be some normalization of comps, but I think we're pretty excited where we said.

One of the relationships that you announced last year was the 1 with Surgery Partners in Montana, which I thought was differentiated in the marketplace, but it's specific to Montana. Can you talk about -- do you see incremental opportunities with Surgery Partners to expand beyond Montana, number one? And number two, just given the experience you have to date, do you see other opportunities kind of specialty opportunity?

I would kind of think about the whole -- why would we partner with a health system that is similar to local surgery partners. These are in surgery partners a little easier to get there. You think they -- they're building surgery centers, site of service is -- aligns very much with us and commercial payers that are looking to how can we get a lower cost of care just as higher, higher quality for surgeries, that type thing. So we wouldn't have -- believe me, we went to Montana with Surgery Partners, they had a big group. And I think they're out there looking at their pipeline of ASCs and they run ASCs, but they also sometimes groups come with them and should they kind of partner with Privia or somebody like us to manage that group why they manage the ASC. So -- and it is really good into our value-based care strategy. If we can move services from an inpatient setting to an outpatient setting, get a lower cost. Obviously, our physicians are working in a value-based care model, so that helps them and it helps the payer. So it's interesting. Payers are actually interested in that type relationship also. So -- but absolutely working with -- we work with Eric's team pretty closely looking at opportunities and things they're looking at from time to time. So we didn't do that just to do Montana.

So should we expect another announcement?

I don't know.

[indiscernible] today.

We're just really good at asking about guidance type.